A Business Case for Kyoto?

The international community, environmentalists and Congress have leveled a stern gaze on the Bush Administration since its official withdrawal from the Kyoto climate change treaty last month, questioning whether the United States plans to take on any leadership to reduce carbon emissions into the atmosphere and address global warming.

But while Washington officialdom ponders its next move and environmentalists anticipate President Bush’s own Kyoto-esque proposal at the next global warming conference in October, experts from Emory University and elsewhere say companies in the United States should be attacking the issue now — before it becomes more expensive.

Some argue Bush was right to keep at arms-length from the Kyoto Protocol, a 1997 agreement that, if ratified, would have required 38 industrialized countries to reduce greenhouse gas emissions to 5.2% below 1990 levels between 2008 and 2012. President Bush has argued the requirements would have seriously undermined the U.S. economy. Some experts say staying out forced other countries to address U.S. concerns about the treaty, but ultimately, businesses will benefit if they work on the problem now – and if the United States participates in an international global warming initiative.

“Keeping our distance was useful for a time, but it will only really be useful if we come back in,” says Ujjayant Chakravorty, an environmental economics expert at Emory University who attended the original treaty discussions in Kyoto, Japan, in 1997.

Others are more blunt: “There is a business case for trying to address climate change issues right now,” said Sarah Wade, manager of the Partnership for Climate Change program at the think tank and lobbying group Environmental Defense.

How We Got Here

The December 1997 treaty is merely paper unless it is ratified by 55 countries that represent 55% of all greenhouse gas emissions among industrialized countries. Three and a half years later, that hasn’t happened, prompting more negotiations at the global warming conference in mid-July in Bonn, Germany. Those negotiations yielded a new agreement among delegates from 178 nations — but not the United States, widely credited with contributing a quarter of the world’s greenhouse gas emissions.

That, in spite of movement from the Kyoto Protocol’s original language that favored U.S. interests. For example, Chakravorty said, the Bonn agreement expanded requirements for emissions trading, a practice that would allow less-polluting countries to sell “pollution rights” to other countries. Further, he said, the Bonn agreement would give greater credit to industrial countries for so-called “carbon sinks” — forested land or other programs that soak up carbon dioxide gases. European nations, with little to gain in that area, had opposed that provision.

“The U.S. was quite right in digging in its heels on this issue,” said David Bederman, an Emory specialist in international environmental law issues. “I certainly agree that we don’t want to sign onto a bad deal.” He said European objections bordered on trade protectionism.

For that and other reasons, the Bush administration has argued the global warming treaty is too harsh on the U.S. economy, an opinion shared by the U.S. Chamber of Commerce, which said it would cost gross domestic product $200 billion a year. Wade says the figure is overblown and doesn’t account for the emissions trading plans, which could help businesses reduce the cost of compliance between 20% and 60%.

A like-minded think tank also argues that economic impact studies “assume the economy is inflexible and unable to adapt to new policy signals,” said Kevin Baumert, a World Resources Institute associate in climate, energy and pollution programs.

Where opportunity lies

The World Resources Institute, Environmental Defense and other advocacy groups have built elaborate partnership programs with the private sector in hopes of persuading companies they can get ahead of the curve now and build emissions awareness into their corporate and financial cultures.

“A lot of the private sector is way out front of the government,” Baumert said. “They see competitive advantages to acting now and acting early.” Wade said that can be hard to sell to some companies, who see the expense as a hit to their bottom line with no immediate return. But companies actually may find pressure from the markets to address it.

Grace Pownall, an expert in global capital markets at Emory’s Goizueta Business School, likens corporate awareness of the issue to the business response to the Exxon Valdez oil spill or the Y2K computer bug. After the Alaska oil spill in 1989 — involving a drunk captain of a single-hulled tanker using ineffective cleanup technology — oil companies invested in drug-testing programs, double-hulled vessels and improved technology. “As soon as the capital markets realized the size of the loss, the other companies had to take steps,” Pownall said. “They were compelled to make disclosures in their financial statements.”

Likewise with the Y2K bug in the 1990s, when companies were forced to shell out cash and upgrade computers before a Jan. 1, 2000, deadline — and outline their efforts in their annual reports. “The costs (for Kyoto) are going to go up astronomically when the deadlines become closer.” With the issue on the mind of the markets right now, “if you don’t say something about it, everybody assumes you’re ignoring it.”

Experts cite a litany of companies, both domestic and international, that are not ignoring the issue. BP/Amoco, for example, is working with Environmental Defense on several emissions reduction incentive programs and Chakravorty notes them as part of research he is starting into the reasons firms self-regulate.

Its initiatives include corporate-wide emissions cap goals, divvied among its business units and part of the evaluation process for its managers, Chakravorty says. Further, the company is developing internal emissions credit trading programs to aid its business units internationally. “If BP has an emissions trading program, who will you turn to if you’re building something like that internationally?” Chakravorty said. “BP can spin off a consulting service.”

Entergy Corporation, the Louisiana-based southeastern power utility, has committed to keeping carbon dioxide emissions at year 2000 levels through 2005 — in spite of any growth in its capacity. It has dedicated a five-year $25 million “environmental initiatives fund” to the task and is focusing on making existing plants more efficient at burning fuel, capturing energy and plugging leaks.

“The area we serve is particularly vulnerable to the kinds of environmental impacts that are being talked about,” said Marty Smith, the company’s director of environmental affairs. “We have to take some risk management and by our example show others they need to take action.” He also notes that self-regulating now may be less onerous than complying with government regulations later.

Case for International Engagement

The Bush Administration has said it intends to offer alternatives to both the Kyoto Protocol and the recent Bonn revision — alternatives that would be less burdensome to the U.S. economy, but, they say, would address the global warming issue. Most agree the likely time for that proposal would be October, for the United Nations’ global warming conference in Morocco. Privately, however, some don’t expect much, if anything from the administration.

Best case, some say, would be minor tinkering with the Bonn agreement and a decision to engage. For some, the worst case would be a domestic-only program affecting U.S. companies. That wouldn’t bother Chakravorty. A domestic program would give the United States a chance to engage in the process before merging with an international effort. That, ultimately, would be key, because without the United States, “there will be serious problems,” he said. “I don’t see any (international) program going without U.S. firms getting in.”

For one thing, environmentalists are skeptical the treaty would gain enough support to be ratified without the largest polluter as a party. That issue rises in greater relief as it relates to emissions trading credits — the so-called “rights to pollute.” Such a scheme could give lesser-polluting countries the rights to sell a credit for, say, $20 per ton of carbon dispatched into the atmosphere. But without U.S. companies, Chakravorty said, there may not be enough of a world market for the credits. Countries will have them to sell, but no one to buy.

Another key piece of the Bonn agreement offers industrial countries credits and financial incentives for providing cleaner-air or non-polluting technologies to developing countries. Chakravorty offers an example: Suppose a U.S. utility wants to open a power plant in India. The choices may include a coal-burning plant or a cleaner natural gas powered plant, with a pipeline from Iran, through Pakistan and into India. Under Bonn, there may be subsidies available to the natural gas option. But unless the United States is a party to an international agreement, that subsidy won’t be available to the U.S. utility.

“The treaty before really did not make sense. There has been a benefit to this process,” said Chakravorty. “Now the question is, under what terms will the U.S. come back in?”